Stepping Through the Multiplier

Suppose that the marginal propensity to consume
c' is 0.6, and that initially aggregate demand is $100 billion
a year higher than national product, so that inventories are
falling by $100 billion a year.

Suppose that firms step up production by $100
billion a year. National income rises by $100 billion a year
as well, consumption spending rises by $60 billion, and so aggregate
demand rises by $60 billion. The $100 billion increase in national
product has lowered the gap between aggregate demand and national
product--but has lowered it by only $40 billion, not by $100
billion.